Cheaper oil: The raise you didn’t get

KathleenBurke

Reporter

Last year, wary consumers regarded falling gas prices as a passing trend. With prices even lower at the start of 2016, will consumers treat them like they’re here to stay?

The price of oil fell below $30 a barrel this week multiple times—the lowest it has been since December 2003—and the average national gas price on Thursday was under $2 a gallon, according to the AAA Daily Fuel Gauge Report, down from about $3.40 two years ago.

In theory, the sustained low gas prices bring significant relief to consumers, from allowing extra discretionary income to greater flexibility in vehicle travel—but it doesn’t always turn out that way.

Historically, consumers have been more sensitive to gas price increases than to decreases, says Greg McBride, senior vice president and chief financial analyst for Bankrate.com. About 60% of consumers said they cut back on spending when gas prices rise, however, less than 20% ramp up spending when prices fall, according to a Bankrate survey. “Consumers have been greeting the drop in prices with skepticism,” McBride says. “But now that they’ve held and continue to fall, I do think they’ll be more inclined to loosen up their pocketbooks this year than last year.”

Despite steady job growth in 2015, wage growth remained relatively stagnant for many Americans last year. Two-car households could save an average of $1,000 a year on what they would normally spend on gas, McBride estimates, calling the extra cash “the pay raise most people haven’t gotten.” For the average consumer, the additional income may translate into increased spending on discretionary items like restaurants and tourism that was originally expected when prices first dropped in 2015.

Low-income households will feel the most relief and see more flexibility in their budgets, says John DeCicco, a research professor at the University of Michigan Energy Institute. “We expect people are going to be more relaxed and consume more,” he says.

What’s more, the “raise” from cheap oil tends is often frittered away—much like real raises from an employer—unless consumers make a conscious effort to sock it away. From May 2014 to May 2015, about 40% of consumers ended up spending their gas savings on necessities rather than saving or spending it on recreational activities, according to a Bankrate survey of 1,000 Americans. Since lower gas prices can sneak up on people, only the most well-budgeted households may see a bump in their savings accounts.

The effects of consistently low gas prices have also been visible on the road and may in some ways counteract the savings at the pump. After stagnating between 2008 and 2013, the number of miles driven in the U.S. a year continued to rise, according to the Department of Transportation. The higher traffic has potential safety implications—the number of vehicle-related fatalities increased by 14% between January 2015 and June 2015 compared with the same period in 2014, according to the National Security Council, resulting in damage costs of $152 billion, in addition to the lives lost.

An unanticipated swing in prices could quickly reverse that pattern. The UMEI releases a quarterly survey on consumers’ perceived affordability of gas prices. In July 2015, the average highest price consumers said they could afford was $5.30 per gallon, down from $5.80 per gallon in October 2013. If prices continue to stay low, consumers may further adjust the level of price per gallon they consider unaffordable, DeCicco says.

A lower consideration of affordability could create swift changes in driving behavior should oil prices become volatile, DeCicco says. When consumers perceive that they cannot afford gas prices, they tend to drive less and turn to alternate forms of transportation. They may shop differently, buying online instead of visiting stores or frequenting big-box stores where they can tackle more of their shopping list. However, as auto makers continue to produce more fuel-efficient vehicles, this effect may be less dramatic than in the past.

Despite the availability of fuel efficient and alternative fuel vehicles, another side effect of lower gas prices is the uptick in SUV sales, a behavior McBride says is “shortsighted.” While prices might seem low for now, locking yourself into a big-ticket purchase that relies on larger amounts of gas is a risky bet, he says.

But don’t worry, car makers are developing plenty of electric vehicles for when prices swing the other way.

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